Stem Cell Debate Might Have Boosted Cryo-Cell's Shares

After noticing that Cryo-Cell (OTCPK:CCEL) shares were bumped up by about 8% this afternoon, I thought it was high time to take a closer look at recent news from this umbilical cord blood bank.

There isn't anything in particular that would obviously cause the shares to boom today, except for the general interest in stem cells following the recent political debate and the follow-up coverage from Time, CNN and the rest of the mainstream media. It might just be that shares are moving up because of increased awareness of the only really morally unambiguous stem cells now available, those from umbilical cord blood. I've been on a downward spiral with CCEL for some time. I looked at it with some enthusiasm in November, made my initial purchase shortly thereafter and filled out my position in February to give me an average cost of about $3.80, but since then I've watched as it dipped and dipped and dipped, most significantly in April when their earnings disappointed thanks to the first salvo in an enlarged and more expensive marketing campaign.

I continue to believe, as I wrote when I first purchased shares, that banking and/or donation of umbilical cord blood will be a significant social trend in the coming decade, as awareness of the value of stem cells rises and the scientific advances made possible with transplantation of u-cord cells become more and more compelling.

But that's not going to happen overnight. Cryo-Cell does not do its own medical research (though they do have a small investment in a company that does). They primarily focus on marketing their services and processing and cryo-freezing cord blood. They charge both a processing fee and an annual maintenance fee to pay for the continued storage. Their focus has been on building a better service, and building and maintaining better facilities that are certified by all appropriate oversight bodies.

And they've done that, but not without some controversy. They had problems a few years ago with some malfunctioning machines and just last year finished accounting for any liability for that, and they have some unpleasant funding mechanisms in place that, while not illegal or unethical, aren't necessarily appealing for small shareholders. Yehuda Fruchter over at Casino Capitalism was a shareholder, and has written about his distaste for these revenue sharing agreements that essentially provide nice royalty streams to investors in exchange for upfront payments -- payments that he calculates work out to a 24% interest rate for CCEL, which is certainly not pleasant. These revenue sharing agreements cover several geographic areas, but certainly not all of them, and I'd imagine that with a cash position of about $9 million they're unlikely to enter into additional agreements.

The metrics to watch for every year are the number of current clients they have (the number of customers who pay that annual storage fee), and the number of new clients they bring in. It's a very simple business, but this year it is a little bit more complicated than usual for a few reasons.

First, they are launching a new product, of which they are the sole licensee. They will be the first cord blood bank to offer processing and storage of Plureon placental stem cells, which are somewhat different than umbilical cord cells and have shown some early potential for treating diabetes and other dreaded illnesses.

And second, partially in conjunction with the launch of this Plureon product (which has been pushed off to the Fall, after being initially planned for March), they're significantly boosting their advertising and marketing budgets to try to take market share and rebrand the company.

With an industry that has a few companies of significant size but is generally quite fragmented, and with very little brand recognition (Cryo-Cell and Viacord are the only names that trip off the tongue, and they're two of the larger players), I think this investment in marketing and building market share is right on target. The Plureon service will allow them to offer the only significantly different product out there and give them some opportunity to grow even with the price increase they initiated in December, since prior to this the only real differentiation between the companies was the reputation and the price (both of which were minor positives for Cryo-Cell in comparison to their major competitors).

This year, the price increase from the end of last year has significantly boosted sales, but they've felt the increase in marketing costs even more and reported a small loss for the last two quarters. They did note in their last earnings release that the new Plureon service and the rebranding of the company have made a significant impact on their operations, with huge boosts in inquiries from expectant parents in response to their advertising campaigns to both parents and doctors -- but we'll have to wait a little while to see if that interest translates into sales.

I'm still holding my CCEL shares, even though I don't know why they're rising today. I still believe in my general thesis that expanded awareness of the value of umbilical cord blood will make the retrieval and storage of these stem cells more prevalent, and that this expansion of the market will lift all the companies involved. With Cryo-Cell you get both a downside and an upside that could cause the shares to diverge from what I think will be the generally positive trend of the industry -- the downside is the spate of legacy revenue sharing agreements that are on their books which cut into some of their proft, and the upside is the launch of the first truly differentiated product in the industry and the absence of an overhang for drug discovery and approval risk.

With the company on the verge of becoming consistently profitable, and with the potential for a relisting on a major exchange if the launch works well enough to boost the share price significantly in the fall, this still seems a fairly decent bet for me. I'll be holding on, watching the rollout of the Plureon service, and, hopefully, enjoying the show.